What happened
Shares of cloud and cybersecurity names were falling across the board today, with market leaders Palo Alto Networks (PANW -2.64%), ServiceNow (NOW -5.74%), and Cloudflare (NET -2.26%) down 4.8%, 4.8%, and 5.6%, as of 2:37 p.m. ET.
The three names appeared to fall in response to high economic uncertainty, as well as disappointing earnings from cybersecurity peer Tenable (TENB -2.26%), which is down 20% today in the wake of its disappointing outlook.
So what
Interestingly, Tenable beat analyst estimates for both revenue and earnings, with revenue up 18.5% year over year, and adjusted non-GAAP (generally accepted accounting principles) EPS of $0.11, which beat expectations by $0.08.
However, cyber and software investors tend to look at billings, which accounts for revenue growth plus the change in deferred revenue, which were only up 13%. A billings rate below revenue growth reflects a decrease in the deferred revenue balance to be booked in the quarters ahead.
Unsurprisingly, that resulted in soft revenue guidance. Second-quarter revenue guidance was between $189 million and $191 million, against a consensus estimate of $193.8 million. For the full year, management estimates the weakness to continue, with revenue between $775 million and $785 million, against an $805.4 million analyst consensus.
Tenable's downbeat results seemed to add another data point to the depressed mood in the tech sector. Last week, IT solutions peer CDW (CDW 0.00%) fell after its own earnings report, with management predicting a high-single-digit decline in IT spend in 2023 versus 2022.
The technology sector entered a severe slowdown last year, and from Tenable's and CDW's early earnings releases, it appears there are no signs of recovery just yet. On the other hand, technology and software names have largely rallied over the first four months of the year, with Palo Alto and Cloudflare still up 30% on the year, despite today's decline, and ServiceNow up over 15%.
Given the year-to-date rally, it's perhaps not surprising to see a big round of profit taking before these companies report earnings, especially as peers issue disappointing numbers and cautious guidance. Of note, ServiceNow reports earnings tomorrow, and Cloudflare reports earnings on Thursday.
Now what
Aside from Cloudflare and ServiceNow, a lot of the big tech FAANG stocks report earnings this week and next week as well, and several of these big names have cybersecurity products. So not only might investors be bracing for slower IT spending and bad outlooks, but given the weaker environment, it may also put these pure-play cyber and cloud names in tougher competition with the in-house solutions of the big cloud platforms.
Overall, the tech sector is still a place to find long-term growth, especially the high-growth cybersecurity market. Yet the long-term growth of the industry is also reflected in these companies' stock prices, with none of these three names making material earnings, while trading at still-healthy price-to-sales ratios between 9 and 20 times revenues.
NOW PS Ratio data by YCharts
Therefore, these high-growth software names have a higher bar to clear for their stocks to work, as growth will have to exceed expectations built into their stocks.
Until inflation and interest rates come down -- either on their own or due to a recession -- these names may continue to be challenged, especially since they're still up handsomely on the year.
